Adjusting Factory Overhead
Refer to the debits in the Factory Overhead account in
The total cost of factory overhead incurred during March is $6,720 ($550 + $5,070 +
$1,100). The $6,720 exactly equals the amount assigned to goods in process inventory
(see 8). Therefore, the overhead incurred equals the overhead applied in March. The
amount of overhead incurred rarely equals the amount of overhead applied, however,
because estimates rarely equal the exact amounts actually incurred. This section explains
what we do when too much or too little overhead is applied to jobs.
Factory Overhead T-Account
Figure 12 shows a Factory Overhead T-account. The company applies overhead using a
predetermined rate estimated at the beginning of the period. At the end of the period, the
company receives bills for its actual overhead costs.
12 Factory Overhead T-account
Figure 13 shows what to do when actual overhead does not equal applied overhead.
When less overhead is applied than is actually incurred, the remaining debit balance in
the Factory Overhead account is called
When the overhead
applied in a period exceeds the overhead incurred, the resulting credit balance in the
Factory Overhead account is called
In either case, a journal entry
is needed to adjust Factory Overhead and Cost of Goods Sold.
13 Adjusting Factory Overhead
Underapplied or Overapplied Overhead
To illustrate, assume that Road Warriors actually incurred
other overhead costs
instead of the $5,070 shown in Figure 10. This yields an actual total overhead cost of
$7,200 in March. Since the amount of overhead applied was only $6,720, the Factory